EMERGING MARKETS-Brazil real surges as market ignores tax hike

Thu Apr 7, 2011 9:40am EDT

* Brazil may allow more currency gains to curb inflation

* Mexico, Chile peso's unchanged as euro falls vs. dollar

* Brazil real up 1.05 pct, Mexico peso dips 0.02 pct

MEXICO CITY, April 7 (Reuters) - Brazil's real surged on Thursday as investors saw Brazilian policymakers as willing to allow further gains in the currency to offset inflation pressure, while Mexico's and Chile's pesos were little changed.

Brazil announced a minor tax increase on foreign borrowing on Wednesday to try to halt the real's appreciation, but the measure was far less drastic than many had feared. [ID:nN06227464]

Brazil has tried a variety of measures to slow the real's gains, but analysts said authorities had few options besides severe capital controls that could spur sharp losses in the real and risk further inflaming inflation by increasing import costs.

"In the near term, tolerance for currency strength looks increasingly a function of inflation expectations," RBS Securities analyst Flavia Cattan-Naslausky wrote in a note.

Data showed consumer prices in Brazil rose more expected in March, pushing the annual inflation rate near the top of a government ceiling and putting more pressure on the central bank to raise interest rates. [ID:nN07268340]

The real BRBY bid 1.05 percent stronger to 1.595 per dollar as it trades near its strongest levels since August 2008.

Analysts at RBS and Barclays Capital both see the real now firming to as strong as 1.50 per dollar as low interest rates in major developed economies like the United States and Japan boost the appeal of Brazil's double-digit debt yields.

Still, a widening current account deficit and less favorable global liquidity conditions could cause Brazil's real to weaken slightly over the next year, a Reuters poll showed on Thursday. [ID:nN06201367]

Mexico's and Chile's pesos slipped from early gains as the dollar firmed against the euro after European Central Bank President Jean-Claude Trichet said a 25 basis point interest rate hike was not necessarily the first in a series of increases.

The weakness of the dollar against the euro had helped support Latin American currencies against the greenback.

The Mexican peso pulled back from its 2-1/2 year intraday high in the previous session.

Mexico's central bank chief signaled on Wednesday little worry about the peso's gains, casting doubt on speculation that Mexico could increase its pace of buying dollars. [ID:nN06202736]

Mexico's peso has lagged the gains seen in other emerging market currencies. The currency's slide during the financial crisis was steep, and it is still trading at much weaker levels than before the crisis.

The Mexican peso MXN= dipped 0.02 percent to 11.8030 per dollar. Chile's peso CLP=CL bid 0.06 percent weaker at 474 per dollar

Offsetting the effect of a weakening euro, the Chilean peso was supported by a rebound in prices for copper, the country's main export. [ID:nLDE7360VP] (Reporting by Michael O'Boyle; Editing by Padraic Cassidy)

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